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A top US central banker has said she was focused on “preserving” the health of the jobs market, as she warned of the potential for “self-fulfilling” negativity on the economy raising the risk of a downturn.
Susan Collins, president of the Boston Federal Reserve, told the Financial Times on Thursday the world’s largest economy was “in a good place” now that inflation had receded and the labour market had cooled without any “red flags”.
With Collins confident inflation was on track to move down to the Fed’s 2 per cent goal, it was time to consider adjusting the benchmark federal funds target range from a 23-year high of 5.25 per cent to 5.5 per cent.
“Preserving that healthy labour market as we continue to bring inflation down, to me is the priority,” said Collins, who will vote on the Federal Open Market Committee next year. “That’s why very soon I do think it will be appropriate to begin easing [and] recalibrating policy in a methodical, data-dependent way.”
Her tacit support for US interest rate cuts as soon as the next policy vote comes hours before the Kansas City Fed’s annual conference officially begins in Jackson Hole, Wyoming. Central bankers are set to meet at the foothills of the Teton Range to discuss the economic outlook and whether to lower borrowing costs now that inflation has eased.
Some rate-setters, such as officials at the European Central Bank and Bank of England, have already cut rates. The Fed increasingly appears poised to join them.
Minutes from the US central bank’s most recent vote in July, published on Wednesday, showed most policymakers thought it would be appropriate to cut interest rates at the forthcoming meeting in September. Several rate-setters even said it would have been “plausible” to lower borrowing costs last month.
Collins declined to say whether she supported a July cut, but acknowledged recent decisions had increasingly become “close calls”.
Supporters of a September cut include Patrick Harker, president of the Philadelphia Fed, who on Thursday endorsed a “slow, methodical approach” starting at that time.
Atlanta’s Raphael Bostic, an FOMC voting member this year, recently told the FT he was “open” to starting the process next month. FOMC voter Mary Daly of San Francisco also told the Financial Times she was growing more confident about inflation’s trajectory — implying support of a rate reduction soon — as she backed a gradual pace of easing.
While most investors expect a quarter-point cut in September, a minority are betting on a jumbo 50 basis point move.
Asked about the Fed’s willingness to lower interest rates in larger, half-point increments, Collins stressed the central bank was not on a “preset path”.
“If there were considerably more weakness than we’ve seen so far, would I think it was important for us to adjust policy accordingly? Yes, I would,” she said.
The Fed’s readiness to lower interest rates comes amid clear signs inflation is headed back to officials’ goal and indications that the US’s strong labour market is finally softening. Joblessness has risen for four straight months, with the unemployment rate now 4.3 per cent.
Revisions published by the Bureau of Labor Statistics this week indicated the number of jobs added to the US economy in the year to March was 818,000 lower than previously thought. BLS data had initially suggested US employers had added 2.9mn jobs over the 12-month period.
A slowdown in the labour market is exactly what the Fed sought to engineer when it set interest rates as part of its efforts to stamp out the worst inflation in decades. What officials do not want to do is tip the economy into an unnecessary recession by keeping borrowing costs too high for too long.
Collins stressed that a “holistic” look at the data did not suggest the US was headed in that direction. But she warned that excessive hand-wringing could raise the prospect of “self-fulfilling negative sentiment about the economy”.
“The risk could be that because of concerns about where things are going, that influences decisions [and] people are overly cautious,” she said. Though that was not something that had yet played out, she added.
Collins said she saw a “clear path” to the Fed achieving both price stability and a healthy labour market without an “unneeded slowdown”.
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